2.

3 What will this book teach you

• the rational behind swing trading
• how to identify stocks to swing trade
• when to enter a trade
• when to exit a trade
• how to maximize profits and minimize risk
• what tools are available to help you select stocks and monitor your progress
• what books to read to learn more about swing trading

3.1 Contact
If you have any questions about the ideas presented in this book or any other swing trading related
matters, you can contact me by email: larry@mrswing.com or visit www.mrswing.com for more
information. I personally answer all emails.
4.4 The Steps in Swing Trading
First, restrict your selection to the universe of stocks that fulfill certain criteria. Choose stocks
that …
• Have a price of at least $7
• Have an average daily volume of at least 500,000 shares Then … STEP 1 –
Identify a stock that is in an uptrend or a downtrend. STEP 2 – For stocks in an
uptrend, identify those that are experiencing a pull-back. For stocks in a
downtrend, identify those that are experiencing a pull-up. STEP 3 – Once an
appropriate candidate is identified, place a limit order to buy (uptrend) or sell
short (downtrend) the stock based on the Master Plan. STEP 4 – Once a stock has
been traded (a position opened), place a stop-loss order
to limit downside risk and place a limit order to identify the price at which you will take
profits. (Ideally, these two orders are placed together as an OCO (One Cancels Other)
order; this is sometimes called an OCA (One Cancels All) order.
 STEP 5 – At the end of each day, adjust the stop loss prices based on the Master Plan.

4.5 What Can You Expect?

First – only a portion of your trades will be executed. The Master Plan is designed to only trade
stocks that initially move in the anticipated direction. If the price moves in the opposite
direction (continues pulling back or pulling up), the trade is not placed.
Second – you will be holding positions for a limited amount of time. While swing trading is not day
trading, you are only holding positions until targets are met.
Third – some of your trades will result in losses, however losses are minimized by the Master Plan
which raises the stops as the stock price rises; this is known as trailing stops. Being
disciplined, and following the Master Plan will insure that profits exceed losses which
means you will make money.

4.6 How Do You Identify Stocks that are Appropriate for Swing Trading?
All of the methods that are used to identify stocks that are appropriate for swing trading are based
on technical analysis. Technical analysis is a way of using historical price/volume patterns to
predict future behavior. It is not necessary to have a detailed understanding of technical analysis
in order to swing trade. There are tools available that can assist investors at every level – from
novice to expert. While there are many sources of information and tools that help identify swing
trading opportunities, this book will focus on those provided at www.mrswing.com. Once you
understand the principles, you can explore other sources of information.
6 The Master Plan – Entry and exit rules that insure successful swing trading

6.1 WHAT is the Master Plan

The Master Plan is a set of rules that determines when to enter and exit a trade. At first, it might
seem a little
 The secret to swing trading success is:
fid i i li d i

simple.

complicated, but once you have place a few trades using the system, you’ll realize it’s really quite
The best part about the Master Plan is that you don’t need to use judgment.

The rules are
mechanical. Two obstacles to successful trading
 are the human emotions of fear and greed. By
following the Master Plan, these emotions will not influence 
your behavior, nor will they interfere with

your success.
 
To keep it simple, we’ll first focus on the long trade. The rules for a short trade are simply the mirror
image of the rules for a long trade. An example of a long swing opportunity is shown below. The
price has declined (pulled back) and you are bullish on the stock.

 
 
6.2 Taking a Profit and Preserving Capital
An important aspect of the Master Plan is setting a profit target and preserving capital. The
approach is fairly conservative – the profit target is approximately 7% with a potential loss capped at
4%. The actual profit is likely to be more than 7% while a loss is likely to be smaller than 4%.
Here’s how it works.
• Once the target price is reached (7% above the entry price), half of the shares are sold, locking
in a 7% profit. The other shares remain invested to benefit from any further increase in price.
• If the price moves against the trade, the maximum loss tolerated is 4%. This preserves capital
for future trades.
• Typically, more trades will produce a profit than a loss. The net result is profit.
• The movement of the entire market is very powerful. When the market is moving with your
trades, a very high percentage of your trades will be profitable.
• When the entire market is moving against your trade, a higher than expected percentage of
your trades will lose. The stop loss protects you from excessive losses.

6.2.1 Profit is taken using a “sell limit” order – once the price is reached, the specified number of
shares are sold.
6.2.2 Capital is protected using a “stop loss” order – when the stop price is reached, all the shares
are sold.
6.3 When to Enter the Trade

Using the Master Plan, swing trading opportunities are identified after the market closes. Trades are
entered in the morning, usually within the first half hour of trading. When you enter the trade (and
the decision rule you use) depends on whether or not the stock has gapped up or down from the
previous day’s closing price. According to the Master Plan, a stock is considered to have gapped up
when it opens 50 cents or more higher than the previous day’s close; it is considered to have gapped
down when it opens 50 cents lower than the previous day’s close. Most frequently, the stock price
will open within 50 cents of the previous day’s close, neither gapping up nor gapping down.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s
close – the order can be placed a few minutes after the market opens.
• Occasionally a stock gaps up 50 cents or more compared to the previous day’s close – the order
is placed at least 30 minutes after the market opens.
• Occasionally a stock gaps down 50 cents or more compared to the previous day’s close – the
order is placed approximately 5 minutes after the market opens.
• To summarize, if the stock gaps in the same direction as the trade, wait 30 minutes, and if the
stock gaps in the opposite direction of the trade, wait 5 minutes.

6.4 How to Enter the Trade

As with when to trade, how to enter depends on whether the stock gaps up/down or not. Typically,
the stock price doesn’t gap up or down and the entry price is based on the previous day’s prices. When
the stock gaps up or down, the entry price is not based on the previous day’s prices, but on the current
day’s prices. Whether based on the previous day’s prices or the current day’s prices, the entry rules
are the same.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s
close – buy the stock the moment it trades 6 cents (1/16) above the previous day’s high. This can be
accomplished by using a buy stop order. This increases the likelihood that the price is moving in the
direction of the bullish (long) trade.
• Occasionally a stock gaps up or down 50 cents or more – buy the stock the moment it trades 6
cents above the high of the new day. This would be 30 minutes after the market opens for a gap up or
5 minutes after the market opens for a gap down.

6.5 What to do After the Trade is Executed

Once the trade is executed, the exit orders are placed.
• The profit order – a sell limit order is placed at a price that is 7% above the entry price.
• The capital preservation order – a sell stop (stop limit) order is placed at 4% below the entry
price OR 6 cents below the low of the day that was used for the trade (whichever is higher) – for a
stock that opened without a gap the previous day sets the prices; for a stock that opened with a gap,
the price action before the day (high and low) sets the prices.
6.6 What to do the Day After the Trade is Executed
As with when to trade and how to enter, the following day’s activity depends on whether the stock
gaps up/down or not. If the stock price doesn’t gap up or down, the stop loss is changed based on the
previous day’s prices. If the stock gaps up or down, the stop loss is changed based on the current day’s
prices. Whether based on the previous day’s prices or the current day’s prices, stop loss rule is the
same.
• When the stock opens within 50 cents ($0.50) of the previous day’s close – if 6 cents below
the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price. This
is known as raising the trailing stop, which further limits the downside risk.
• When the stock gaps up or down 50 cents or more – wait 30 minutes for a gap down or 5
minutes for a gap up – if 6 cents below the today’s low is higher than yesterday’s stop loss, raise the
stop loss to this new price.

6.7 What happens if the Trade is Not Executed

Let’s say that you are receiving recommendations from MasterSwings or MrSwing Lite and your
trade is not executed on the day the order is placed. You can repeat the process for up to 5 trading
days.
• If the stock gaps up or down, wait the appropriate amount of time (30 minutes for a gap up and
5 minutes for a gap down) – determine the entry and exit prices based on the current day’s prices.
• If the stock opens with 50 cents of yesterday’s close, the entry and exit prices are based on the
previous day’s prices.

The chart on the following page should make the trading rules clear.
Long Swing
6.8 Once half the shares close at a 7% profit, the other half remains open to “ride the wave”.

When do we close the second half of the trade?

nd
A trailing stop is used to close the 2 half of the trade. Remember that a trailing stop is used to
raise the sell stop (stop loss) during the trade. The same rules apply (see 6.6 above). The shares are
sold when the price drops to 6 cents below the low of previous day (no gap on open) or the current
day (gap on open).

6.9 The Short Swing – how we make money when we think the price of the stock is going down
A short swing is used to make money when a stock’s price is predicted to go down. We sell short the
stock. For those unfamiliar with shorting stocks, we sell the stock without having previously owned
it. Additional detail about shorting stocks can be found the Appendix. For now, it is only necessary
to know that our goal is to sell the stock and buy it back at a lower price.
While anyone can sell short, you must make sure that your brokerage account is approved for trading
on margin. If you do not have a margin account, simply fill out the necessary forms with your current
brokerage firm or open an account with one of the firms recommended for swing trading.
A short swing is a mirror image of a long swing. The price of a stock in a downtrend tends to have
periodic, short-term rallies (pull-ups) as the price moves lower. The set up for a short swing is the
brief rally (or pull-up). The decision rules in the Master Plan help enter the trade when the stock
is resuming it’s downward path.
A chart showing a downtrend that is conducive to short swing trading is shown on the next page.
Notice in the chart below that the downtrend is interrupted by short-term rallies (pull-ups). The
trade is placed after a short-term rally (or pull-up), once the stock resumes its downtrend.
The trade is entered on a day when the price falls below the low of the previous day.
The rules for entering and exiting a short swing are shown schematically on the next page.
While the rules might seem somewhat complicated, several brokerage firms make the process quite
easy. Interactive
Brokers – described in the
next section – allows you to enter the three components of the trade all at the same time. For a
short swing they are:
• A sell stop to sell the stock when the price moves below the stop price
• A buy stop to buy back the shares if the price moves up 4%
• A buy limit to lock in profits (on ½ the shares) when the price drops 7%

The schematic diagram provides instructions for how to adjust these prices on the second day, third
day, and so on, based on whether the stock has been sold short or not. The schematic provides exit
instructions as well.
Short Swing
8 The Essentials of Technical Analysis
8.1 Intro
We humans have a very hard time making fast decisions with complicated info. That is why, as human
traders, we try to simplify trading as much as possible, in order to scan fast & accurate trading
opportunities in a few seconds. As Albert Einstein used to say: keep things as simple as possible nut
not any simpler!
The following Technical Analysis (TA) tools are part of the daily charting arsenal:
.• Candle stick
.• Volume
.• Equivolume
.• MA (???)
.• Force Index
.• DMI
.• Up/Down/In/Out
.• ...
8.2 Why does Technical Analysis work?
Simply because the large professional traders cannot help leaving behind considerable evidence
regarding their opinion on the direction of the market: volume provides clues as to the intensity of a
given price move...
The key is psychology: you trade people, not stocks. People never change...most traders keep on
making the same mistakes again and again...luckily for us. Read this again and think about it!
8.5 Volume
Volume is simply the number of shares traded during a given timeframe (e.g.,
hour, day, week, month, etc.). The analysis of volume is a basic yet very important component of
technical analysis. Volume provides clues as to the intensity of a given price move.
High volume levels are characteristic of market tops when there is a strong consensus that prices will
move higher. High volume levels are also very common at the beginning of new trends (i.e., when
prices break out of a trading range). Also, just before market bottoms, volume will often increase due
to panic-driven selling.
Volume can help determine the strength of an existing trend. A strong up-trend should have higher
volume on the upward legs of the trend, and lower volume on the downward (corrective) legs.
Similarly, strong downtrends usually have higher volume on the downward legs of the trend and lower
volume on the upward (corrective) legs.

 The secret to swing trading success is:

Confidence, Discipline, Focus and Patience

 Trend Reversal Above-Average Volume with LITTLE price

 movement Above-Average Volume after a huge advance or

decline Trend Continuation Above-Average Volume with
STRONG price movement Above-Average Volume with
 breakout Below-Average Volume with NO price movement
Volume

+DI: current positive directional index, the range of highs divided

 
 
Figure 6: Volume

8.7 Moving Averages

A Moving Average (MA) is an indicator that shows the average value of a security's price over a
period of time. When calculating a moving average, a mathematical analysis of the security's average
value over a predetermined time period is made. As the security's price changes, its average price
moves up or down.
There are five popular types of moving averages: simple (also referred to as arithmetic), exponential,
triangular, variable, and weighted. Moving averages can be calculated on any data series including a
security's open, high, low, close, volume, or another indicator. I use only the 10-20 & 50 day simple MA
on closing prices.
 .• Higher Highs & Higher Lows
.• Rising MA10 & MA20
.• Higher volume on the upward legs
.• closing prices ABOVE the MA20 & MA50
.• an Uptrend stock will find support at either the 20

or 50 day MA DownTrend:

.• Lower Highs & Lower Lows

.• Falling MA10 & MA20

.• Higher volume on the downward legs

.• closing prices BELOW the MA20 & MA50

.• a downtrend stock will find resistance at either the

20 or 50 day MA

8.8 Force Index

Force Index is an oscillator developed by Dr. Alexander Elder in his excellent book: “Trading for a
Living”. Force Index combines the three most essential pieces of market information: .• the direction
of price change .• its extent .• its trading volume. It provides a new, practical way of using volume to
make trading decisions.
Although Force Index can be used raw, I prefer to smooth them with moving average:
A 3-day MA of Force Index is a very sensitive indicator which shows the short-term battle between the
bulls and the bears. And the 13-day MA of Force Index identifies the longer-term battle between bulls
and bears.

BUY opportunity : .• FI-13MA => 0 .• FI-3MA <= 0 .• UPTREND

SELL opportunity: .• FI-13MA =<0 .• FI-3MA >= 0 .• DOWNTREND

The calculation of the DMI is fairly complex and consists of three lines:

Up (Green)
indicates the
current high
 The secret to swing trading success is:
Confidence, Discipline, Focus and Patience
is higher
than the  Trend Reversal Above-Average Volume with LITTLE price
previous high
and the  movement Above-Average Volume after a huge advance or
decline Trend Continuation Above-Average Volume with
STRONG price movement Above-Average Volume with
current low
is higher  breakout Below-Average Volume with NO price movement

Volume
than the
previous low. +DI: current positive directional index, the range of highs divided
by the price range over the last day and previous close, smoothed
over a given number of periods. -DI: current negative directional
index, the range of lows divided by the price range over the last
day and previous close, smoothed over a given number of
periods. ADX: modified moving average of the difference of +DI
and -DI divided by the sum of +DI and -DI, multiplied by 100.
UpTrend: ADX > 30 the higher the better +DI > -DI
DownTrend: ADX > 30 the higher the better -DI >
+DI
Down (Red) indicates the current high is lower than the previous high and the current low is
lower than the previous low.
In (Yellow) indicates the current high is lower than the previous high, and the current low is
higher than previous low.
Out (Blue) indicates that the current high is higher than the previous high, and the current low is lower
than the previous low.
.• Equivolume and ForceIndex indicators as described in my education section
.• Technical Indicators
Our proprietary indicator, IQC Zone, Relative Strength Ranking, and Money Flow.
Do you monitor all list stocks every day? How do you pick one to play?
NO ! I execute our swings scans every single day and select approx. 25 stocks i like!!
THEN? I divide my portfolio into 15 equal pieces & the first 15 (of the 25 stop orders) that pass the
swing test are traded, i.e. I only risk 6.66% on each trade.
Available Technical Indicators
Overlays
.• Bollinger Bands
.• Linear Regression
.• Moving Average
.• On Balance Volume (OBV)
.• Parabolic SAR
.• IQC Zone

.• Up/Down/In/Out Indicators

.• Average True Range

.• Breadth Advance/Decline

.• Commodity Channel Index (CCI)

.• Directional Moving Index (DMI)

.• Equivolume

.• Force Index

.• Moving Average Convergence/Divergence (MACD)

.• McClellan Oscillator

.• Momentum

.• Money Flow

.• Relative Strength Ranking (RSR)

.• Relative Strength Index (RSI)

.• Relative Strength Index Classic (RSI Classic)

.• Stochastics

.• Ultimate Oscillator .• Volatility .• Volume and Volume Average .•

11 Case Studies
Trade: DFXI
CLOSE > SMAC50 and CLOSE >
SMAC20 (to be sure the stock
is still in an uptrend) and
HIGH < HIGH1 and HIGH1 < HIGH2 (the stock must be experiencing a 3 day decline/pullback within the
context of a uptrend) AND FORCE3<=0 AND FORCE13>=0 (the short term battle is now won by the
bears, but still the bulls are in control of the longer-term battle)
CLOSE > SMAC50 and CLOSE > SMAC20 (to be sure the stock is still in an uptrend) and
HIGH < HIGH1 and HIGH1 < HIGH2 (the stock must be experiencing a 3 day decline/pullback within the
context of a uptrend) AND FORCE3<=0 AND FORCE13>=0 (the short term battle is now won by the
bears, but still the bulls are in control of the longer-term battle)

Swing Entry price: $42.48 (High of yesterday $42.42 + $0.06) Stop Loss price: $41.35 (order $0.06
below the low of the previous day $41.41 - $0.06) Target: $45.45 (entry price +7%) Exit: $45.45
(05/02/2002) & $43.44 (05/02/2002) Reason for exit: $45.45 at a 7% gain on the long swing trade
& $43.44 trailing stop low of yesterday $43.50 - $0.06 Profit/loss: $1.965 = ($2.97 + $0.96)/2 or
gain of 4.63%

Trade: PFG
Swing Entry price: $27.26 (High of yesterday $27.20 + $0.06) Stop Loss price: $26.35 (order $0.06
below the low of the previous day $26.41 - $0.06) Target: $29.17 (entry price +7%) Exit: $27.94
(04/18/2002) Reason for exit: $27.94 trailing stop low of yesterday $28.00 - $0.06 & Target of 7%
never met Profit/loss: $0.68 or gain of 2.49%

Trade: PTEN
Date: 03/26/2002 Reasons for trade/setup: CLOSE > SMAC50 and CLOSE > SMAC20 (to be sure the
stock is still in an uptrend) and HIGH < HIGH1 and HIGH1 < HIGH2 AND (the stock must be experiencing
a 3 day decline/pullback within the context of a uptrend) and FORCE3<=0 AND FORCE13>=0 (the short
term battle is now won by the bears, but still the bulls are in control of the longer-term battle)
Swing Entry price: $26.84 (High of yesterday $26.78 + $0.06) Stop Loss price: $25.94 (order $0.06
below the low of the previous day $26.00 - $0.06) Target: $28.72 (entry price +7%) Exit: $28.72
(03/28/2002) & $29.99 (04/03/2002) at open Reason for exit: $28.72 at a 7% gain on the long
swing trade & $29.99 trailing stop low of yesterday $30.31 - $0.06 Profit/loss: $2.515 = ($1.88 +
$3.15)/2 or gain of 9.37%